Economic statistics have been pointing only one way since the past 3-4 quarters - down! Though the NBER announced a few months back that we 'technically' entered recession some time in Q4 2007, we really didn't feel the intensity of the slow down till Q3 2008, especially after the Lehman-Merrill day in September '08. Almost all indicators are very bleak by now - retail sales fell by 1.8 and 1.2 percent respectively in November and December, with same store sales falling close to 2.2 percent on average as compared to the same period in 2007. This, along with an exteremly depressing unemployment rate of 7.2%, paints the picture of a deep, gloomy slowdown period. The big question in every one's mind is - is this the start of a deeper recession or is the worst behind us?
Without doubt, the slowdown has deeply impacted consumer sentiment and thus damaged the trend of the single largest factor which drives over two-thirds of this nation's GDP-consumer spending. However, I would personally argue this is more of a reversal of the exuberant trends seen from '05-'07 rather than point to anything that's inherently unhealthy in this sector. The consumer hasn't stopped spending - just to illustrate this point, let me mention an interesting experience I had when I was at an outlet mall south of Boston recently along with my spouse. We saw a long line of 15+ people waiting outside the door of an Uggs store and was curious as to why. Apparently, Uggs was offering some good deals, and there were more than enough people interested to make the folks who run the store 'control' intake of customers to prevent over crowding!
We saw pretty much the same at a nearby Coach (NYSE:COH) outlet, which was offering 50%+ discounts (which still doesn't make the purchase price reasonable for many!) and there were throngs of women poring over handbags, clutches and other accessories on sale. I have heard the same from many of my colleagues and friends across the region - which all points to the fact that the consumer is still willing to spend money, provided the deals are 'right'.
So, what's happening is more of a change in the way consumers approach spending than any doomsday no-spending behavior as many would expect us to believe. If people prefer buying at Wal-Mart (NYSE:WMT) and pay less money for exactly the same merchandise as compared to the fancy department store locally, or if they switch from Saks (NYSE:SKS) to Gap (NYSE:GPS) for a larger percentage of their clothing purchases, it's probably for the good.
We saw a long period of (close to) reckless spending, depleted savings rates and bloated same-store retail numbers, a period where 'value' took a backseat and the consumer stretched savings and on-paper home equity values to splurge on not-so-necessities. We are just seeing a 'good' reversal of these trends - this is exactly the same psyche that led consumers to (hopefully) permanently alter their outlook on fuel-related spending when oil touched 147 a barrel in Q3 '08. Despite prices crashing down to $40 a barrel levels, consumers have continued to stay more 'conscious' of the money that are spending on running their cars and heating up their homes. As I said earlier, this was probably one of the best things to happen from the oil price shock in late '08. And probably this retail spending 'pattern change' is a better thing for the consumer in the long run too!
My basic argument is that there is still some 'sentiment' around and consumers are not sitting at their homes and looking out of their windows altogether - which is good for the economy. As I had mentioned in one of my blogs in late '08, the only way to step up from this slowdown is to loosen fiscal prudence for a brief while and indulge in drastic government spending. Don't get me wrong - I am not typically a demand-side economics supporter, but the current unprecedented situation warrants unusual strength in fiscal and monetary actions. We don't have much of a leverage in monetary policy, with Fed rates already close to zero - thus there's no option but to use the fiscal lever!
If Obama does succeed, even moderately, in targeting fresh money to areas like construction, healthcare, green energy and education, the very impact of this in downstream sectors and resulting gains in employment would be more than enough to crank the engine back. From what he's said so far, it looks very much like it's going to be a very commonsensical approach - everyone cannot expect taxes to be cut and sops to be given, but still expect the economy to be revived, and sops can only be targeted at the right sectors (high-employment industry areas and low-income population). Once we see early signals in the US, there would be downstream impact across global markets and a synchronized global recession can probably be turned around!
There are many who opine that history points to a longer period of slow-down, but when we compare this slow down to earlier slowdowns, what we should note is that everything's been played in pretty much fast forward so far - and a pickup in trends would be quite quick too, given the right stimulus. Advances in economic theory and fiscal and monetary tools and policies have just made economic cycles more drastic! But hopefully we should see some thing even better - if policy makers can use this opportunity to drive permanent shifts in trends towards increased savings, tempered leverage and fiscal prudence (long-term), we should see a more stable growth trend once a turn-around happens!
Even by risking the probability of being wrong, I would stick out my neck and say that we should be back to near-sanity conditions by mid-to-late Q3 2009. We should see unemployment trends slowly reverting, housing and real estate stabilizing, and manufacturing looking up from it's trough. So, we are still looking at another two quarters of bad statistics and sad news on the unemployment and consumer spending fronts, but there's light at the end of the tunnel. That is, assuming Obama and his team does not flounder completely - the chances of which look pretty grim. Here's promising and hoping a more cheerful look-back blog for late 2009!
Stock position: None.